Any successful business strategy needs an exit plan, every contractneeds to address the issue of 'What do we do if one of us breaches the contract?' All contracts, but most importantly where the parties are in different countries, should address four important issues:
- the place where disputes are to be decided;
- the courts of which country have jurisdiction to determine disputes;
- the law of which country that will be applied to decide the parties’ rights and obligations; and
- whether arbitration rather than the court system is a better method of resolving disputes.
It is important to remember that the additional costs of conducting litigation in another country, a different legal system with different rules, language and culture, together with doubts about the integrity of the other country’s legal system, reinforces the argument that you should always consider which country’s law and legal system will apply in deciding the rights and obligations of the parties in the event of a dispute. It is not always best to choose the courts of your own country and its laws to decide a dispute. There may be many instances where the courts and the laws of the other party’s country or some other country are better suited to your interests. Whichever legal system you decide is best suited to your purposes, it is important to realise that it is often very difficult to enforce a court order in another country. A court order obtained in Australia in your favour against a Chinese business operating in the People's Republic of China (PRC) with no assets in Australia is useless if you find it too difficult and expensive to enforce the Australian court order in the PRC.
The New York Convention
Under the New York Convention 1958 - where the parties to a contract are residents of countries that are members of the Convention and have agreed that disputes are to be determined by arbitration rather than by a court - once a decision is duly made by the arbitrator, that decision may be registered and then enforced in the other party’s country as a court order as if made in that country. Every major trading country in the world including Australia’s major trading partners such as the PRC and the United States are all members of the New York Convention. (For the full text of the Convention, see the United Nations Commission on International Trade Law website). This means if an arbitrator makes a decision in Australia or the PRC, that decision may be registered in the courts of the other country and enforced as if the arbitrator’s order is a court order made by a court. What is important to consider is that when a contract is formed with a party in another country, you have the opportunity of agreeing not only the place where disputes are to be decided, the law of the country that is to be applied in deciding the outcome of the dispute, but that disputes may be determined by arbitration rather than through the court system. It is very common, provided the reasons are bona fide, to choose a neutral country’s laws to be applied in the event of a dispute. For example, in contracts between parties in Thailand and Australia, if the parties cannot agree on the law of either Thailand or Australia to be applied in deciding the parties’ rights and obligations under a contract, they may agree that the law of the United Kingdom is to be applied, while arbitration of the dispute is to take place in Singapore. You may even agree on the arbitration rules to be applied (for example the UNICTRAL Model Rules) and the language in which the arbitration is to be held (e.g. English). Notice that the contract, the place of business of the parties and the place the dispute is to be determined have nothing to do with the UK. The parties will however generally be entitled to choose UK laws, or the laws of any other place, to determine their dispute. In this case, both parties can be satisfied that both the place and the law to be applied is neutral. If your bargaining power allows you to dictate not only the law to be applied in deciding the parties’ rights but also the place, would you prefer Australia or China? What we all need to remember is that when a contract is made, it is not made in heaven. An exit strategy needs to be agreed in advance if it all goes badly wrong. -James Millea is a senior associate at Argyle Lawyers